Income tax computation

chapter 1 Income tax computation Contents Introduction Examination context Topic List 1 Charge to income tax 2 Gifts to charity 3 Independent taxation and jointly owned assets 4 Allowances for taxpayers aged 65 and over Summary and Self-test Technical reference Answers to Self-test Answer to Interactive question 1

Taxation Introduction Learning objectives Calculate taxable savings income, income from property, dividend income, taxed income and investment income Calculate total taxable income and the income tax payable or repayable for employees, company directors, partners and self employed individuals Tick off Specific syllabus references for this chapter are 2(c) and 2(f). Practical significance It is very important to know which types of income are taxable and which are exempt. The complex structure of the UK tax system means that some income is paid after deduction of tax and some is paid gross and it is essential to understand how this works. Many taxpayers without a background in finance struggle with this concept and make errors when making income declarations and completing official forms. UK charities rely heavily on individuals and companies using the Gift Aid system to boost their income. Making a Gift Aid declaration is a simple but effective way of increasing the value of your donation. Stop and think Do you understand your own tax bill? It is likely that you receive employment income and also maybe income from investments such as dividends or bank account deposits. Do you realise that you pay different rates of tax on different types of income? Are you paying the correct tax? Do you make a note of all payments you make to charity (and ensure such payments come under gift aid) to reduce your tax bill (if you are a 40% tax payer)? Working context The calculation of taxable income is an essential tool for an accountant in practice. Not only will this be useful at work, but it will also be useful in your personal life as many friends and relatives will assume that you can help them with their tax. Although most of the calculations will be performed by computer programme, there will be occasions when you need to check the figures and understanding the process will also help you check for reasonableness. Syllabus links In Chapter 2 of your Principles of Taxation study manual, you learnt about the basics of the Income Tax Computation. This included chargeable and exempt income, the computation of taxable income, the personal allowance, computing tax liability, Gift Aid and allowances for taxpayers aged 65 and over. In this chapter, we review this knowledge and then extend it in relation to charges on income, further gifts to charity, income from jointly owned assets and more details about the allowances for taxpayers aged 65 and over. 2

INCOME TAX COMPUTATION 1 Examination context Exam requirements In the examination candidates may be required to: Prepare an income tax computation for an individual Identify whether income is taxable or exempt Determine whether income is received net or gross Understand the treatment of gifts/payments to charities Allocate income from jointly held assets between spouses/civil partners Calculate the allowances available for individuals aged 65 and over Examiner's comments on how students tackle questions A methodical approach is required to prepare an income tax computation. Historically candidates have scored well on income tax computations if they know the pro forma computation and have worked their way down the question one step at a time. 3

Taxation 1 Charge to income tax Section overview Taxable persons are individuals, trustees and personal representatives. Some income is exempt from income tax, eg income from ISAs, certain VCT dividends, Premium Bond prizes. Income received net must be shown gross in the income tax computation. There are three types of income: Non-savings income, Savings income and Dividend income, each with its own rate of tax. There are 7 steps to calculating a person's income tax liability. Taxable income is Net Income less the Personal Allowance. Tax payable or repayable is a person's tax liability less tax deducted at source. 1.1 Taxable persons Income tax is chargeable each tax year on: Individuals every individual is treated as a separate taxable person (including children) and is liable to income tax on his or her own income Trustees liable to income tax on income of the trust Personal representatives (executors or administrators) liable to income tax on income from the estate of a deceased person Children who are under 18 are taxable persons in their own right in the same way as adults. However, the income of most children is covered by their personal allowance and so no income tax is actually payable on it. However, if the income is generated from a gift by a parent, this income is treated as the income of the parent, not the child, if it exceeds 100. Transfers of income generating assets by a parent into the child's name are therefore ineffective for utilising the child's personal allowance. However, transfers by other relatives to a child are tax effective. 1.2 Chargeable income and exempt income The main types of chargeable income are: Income from employment (Employment income) Income from trades and professions (Trading income) Income from renting out property (Property income) Income from investments such as interest on loans and bank and building society accounts (Savings income) Income from investments such as dividends (Dividend income) Income from other sources (eg income from casual work) (Miscellaneous income) The main types of exempt income are: Interest on National Savings Certificates Income from Individual Savings Accounts (ISAs) Dividends received on shares held in a Venture Capital Trust (VCT) so long as certain conditions are satisfied (see later in this text) Betting, lottery and Premium Bond winnings 4

INCOME TAX COMPUTATION 1 Some social security benefits such as housing benefit and child benefit Statutory redundancy pay and the first 30,000 of compensation received for loss of employment (see later in this text) [Hp52] First 4,250 of gross annual rents from letting under the rent-a-room scheme (see later in this text) Scholarships Income tax repayment supplement 1.3 Income taxed at source and income received gross Income received net must be shown gross in the income tax computation. Income which is received net includes: Interest on investments such as building society interest, most bank interest, debenture and other loan interest paid by UK companies (received net of 20% tax, gross up by 100/80) Patent royalties received (received net of 22% tax, gross up by 100/78) Employment income (taxed under PAYE, normally stated gross in the examination. PAYE deducted will be given as a separate figure) Dividends from UK companies are received with a deemed 10% tax credit. The dividend must be grossed up by 100/90. The tax credit is not repayable, but can reduce income tax payable. Income received gross includes: Property income Trading income Miscellaneous income National Savings and Investments (NS&I) Easy Access Savings Account and Investment Account interest Interest on government securities (gilt-edged securities/gilts) such as Exchequer Stock and Treasury Stock Interest received gross by an individual who has signed a declaration of non-taxpayer status and supplied a certificate to the bank/building society (self-certification); mainly used by children and pensioners Interest on non-commercial investments such as a loan between friends 1.4 Types of income The three types of income are: Non-savings income (Employment income, Pension income, Taxable social security benefits, Trading income, Property income, Miscellaneous income) Savings income (Interest from investments) Dividend income (Dividends from UK companies) 5

Taxation 1.5 Steps to calculating the income tax liability To calculate a taxpayer s income tax liability the following steps must be performed: Step 1 Add together all types of chargeable income to give total income. Step 2 Deduct reliefs, such as losses (Chapter 7) and gifts of assets to charities (Section 2.3 below) from the relevant component of total income to give net income. Step 3 Deduct the personal allowance from the relevant components of net income to give taxable income. The basis personal allowance for 2007/08 is 5,225. [Hp5] The personal allowance is deducted from the different components of income in the following order: Non-savings income Savings income Dividend income Step 4 Calculate tax at the applicable rates on the taxable income. Tax on the three types of income is calculated in the following order: Non-savings income Savings income Dividend income The rates of tax for 2007/08 are: [Hp1] Non-savings income Savings income Dividend income Starting rate 10% 10% 10% Basic rate 22% 20% 10% Higher rate 40% 40% 32.5% Step 5 Add together all amounts of tax at Step 4. Step 6 From the Step 5 figure, deduct tax reductions such as Venture Capital Trust (VCT) relief, Enterprise Investment Scheme (EIS) relief (Chapter 2) and married couples allowance (Section 4.2 below). Step 7 To the Step 6 figure, add certain other amounts of tax, such as the pensions annual allowance charge (Chapter 3). The resulting figure is the income tax liability. Tax payable or repayable is the amount of income tax payable by a taxpayer (or repayable to him) under self-assessment after reducing the income tax liability by tax deducted at source, and increasing it by income tax retained, for example, on patent royalties paid (Chapter 5, Section 5.1). 6

INCOME TAX COMPUTATION 1 1.6 Proforma income tax computation The proforma income tax computation is as follows: A Taxpayer Income tax computation 2007/08 Non-savings Savings Dividend income income income Total Income Employment income X Interest X Dividends X Property income X Total income X X X X Reliefs Losses, gift of assets to charities (X) (X) Net income X X X X Personal allowance (5,225) (5,225) Taxable income X X X X Tax X Less: tax reductions (for example, married couples allowance) (X) Income tax liability X Less: tax deducted at source (X) Plus: tax retained on patent royalties paid X Income tax payable X The proforma will gradually be built up over the following chapters of the Study Manual. 7

Taxation Interactive question 1: Computation of tax payable Michael was born in 1970. In the tax year 2007/08, Michael had the following income: Gross salary 23,695 (PAYE deducted 3,788) Property income 6,000 National Savings Certificates interest received on cashing in certificates 1,100 Betting winnings 500 Building society interest received 320 Bank deposit interest received 400 Dividends from UK companies 1,890 Requirement Using the standard format below, compute the income tax payable by Michael for 2007/08. Michael Tax payable [Difficulty level: Moderate] Non-savings Savings Dividend income income income Total Net income Less: PA Taxable income Tax Tax liability Less: tax deducted at source Tax payable See Answer at the end of this chapter. 8

INCOME TAX COMPUTATION 1 Worked example: Anita Anita has a part-time cleaning job and earns 4,560 in 2007/08. She also received the following income: National Lottery scratch card winnings 250 Bank interest 380 Dividends from UK company 549 Anita is aged 42. Requirement Calculate Anita s income tax payable/repayable. Solution Anita Income tax repayable Non- savings Savings Dividend income income income Total Employment income 4,560 BI 380 100/80 475 Dividends 549 100/90 610 Net income 4,560 475 610 5645 Less: PA (4,560) (475) (190) (5,225) Taxable income NIL NIL 420 420 Tax 420 10% 42 Less: tax credit on dividend (restricted) (42) 475 20% (95) Repayable (95) Note that the tax credit on dividends is set off first to ensure that the full amount of tax deducted from bank interest is recoverable. However, the excess tax credit of 19 (61 42) is not recoverable. 2 Gifts to charity Section overview Gift Aid gives tax relief for cash donations to charity. The payroll giving scheme allows employees to obtain tax relief on gifts to charity out of employment income. Gifts of certain shares and land to charity are deductible in computing net income. 2.1 Gift Aid The Gift Aid Scheme gives tax relief for cash donations to charity. A gift aid declaration must be made. Basic rate tax relief is given by deeming the gift aid donation to be made net of basic rate tax. Higher rate tax relief is given by extending the basic rate band by the amount of the grossed up gift aid donation, at Step 4. 9

Taxation An election can be made to carry back a gift aid donation to the previous tax year. This election must be made to HMRC no later than the date when the taxpayer files his tax return for the year and, in any event, no later than 31 January following the end of the tax year. 2.2 Payroll Giving Scheme Employees can make donations to charity under an approved payroll giving scheme. The employer deducts the amount of the donation from the employee's employment income. Income tax is then calculated on employment income after the deduction of the charitable donation. This gives income tax relief at the individual's highest rate of tax. [Hp67] 2.3 Gifts of assets to charity A deduction is given against total income at Step 2, if the whole of any beneficial interest in qualifying shares or securities is given, or sold at an undervalue, to a charity. The amount that an individual can deduct in calculating his net income is: The market value of the shares or securities at the date of disposal; plus Any incidental costs of disposing of the shares (broker's fees, etc); less Any consideration given in return for disposing of the shares; and less The value of any other benefits received by the donor, or a person connected with the donor, in consequence of disposing of the shares. The following are qualifying shares and securities for these purposes: [Hp122] Shares or securities listed on a recognised stock exchange (UK or otherwise); Shares or securities dealt with on a recognised stock exchange (UK or otherwise) (this definition appears to include Alternative Investment Market shares); Units in an authorised unit trust; Shares in an open-ended investment company; Holdings in certain foreign collective investment schemes. Individuals can also claim a deduction in calculating net income, equal to the market value of any freehold or leasehold land or buildings given to a charity. Where land is sold at an undervalue, relief is given for the difference between market value and the price paid by the charity. The deduction is given when calculating net income and is made from income in the following order: Non-savings income Savings income Dividend income 3 Independent taxation and jointly owned assets Section overview Each individual is a separate taxable person. Income from assets owned by spouses/civil partners is usually split equally. A declaration of ownership in unequal proportions can be made. Income from jointly held shares in family companies is always split in accordance with actual ownership. 10

INCOME TAX COMPUTATION 1 3.1 Independent taxation Every individual is treated as a separate taxable person who is liable to income tax on his own income. An income tax computation must be prepared for each spouse/civil partner, showing his or her own taxable income. 3.2 Jointly owned assets A potential problem arises in deciding how spouses/civil partners are entitled to income received from a jointly held asset. Special rules apply to allocate income where spouses/civil partners living together hold property jointly (eg a joint holding of shares, land or bank account). The basic rule is that spouses/civil partners are deemed to own the property in equal proportions, irrespective of actual ownership. Therefore, joint income is normally divided equally between them (ie a 50/50 split). If spouses/civil partners actually own the property in unequal proportions, they can make a declaration to HM Revenue & Customs (HMRC). This declaration is optional but, if made, each spouse/civil partner will be taxed on the income to which he or she is actually entitled. Notice of the declaration must be sent to HMRC within 60 days of the declaration. A declaration cannot be made in respect of a jointly owned bank or building society account. The declaration cannot be made for an unequal split unless it is consistent with the owners' actual entitlements. Therefore, if property is actually held jointly in equal proportions, it is not possible to make a declaration for any other split in order to save tax. Income distributions (ie dividends) from shares in a family company which are jointly owned by spouses/civil partners will be taxed according to actual ownership. This income will not be automatically split equally between them. 4 Allowances for taxpayers aged 65 and over Section overview Personal Age Allowance (PAA) is available to taxpayers aged 65 and over instead of the basic Personal Allowance. Gift Aid donations need to be taken into account when working out any reduction in PAA. Married Couples Allowance (MCA) is reduced in the same way as PAA if the taxpayer's income exceeds a certain limit. MCA can be transferred from one spouse/civil partner to the other. 4.1 Personal Age Allowance (PAA) The Personal Age Allowance is available to older taxpayers instead of the basic Personal Allowance, at Step 3. There are two levels of Personal Age Allowance a lower level for those aged 65 to 74 at the end of the tax year (7,550 for 2007/08) and a higher level for those aged 75 and over at the end of the tax year (7,690 for 2007/08). [Hp5] Where the taxpayer's net income exceeds 20,900 in 2007/08, the Personal Age Allowance is reduced by 1 for every 2 that the net income exceeds 20,900 until the amount of the basic Personal Allowance is reached. The taxpayer's net income for this purpose is reduced by the gross amount of any gift aid donation. 11

Taxation Worked example: Personal Age Allowance Emily was born on 29 March 1935. Her net income for 2007/08 is 23,000 which is all non-savings income. Emily made a gift aid donation of 390 in December 2007. Requirement Compute Emily's taxable income. Solution Emily is aged 73 on 5 April 2008. The grossed up gift aid donation is 390 100/78 500 Personal Age Allowance 7,550 Less: ([23,000 500] 20,900) = 1,600 ½ (800) Reduced Personal Age Allowance 6,750 Taxable income: Net income 23,000 Less: Personal Age Allowance (6,750) Taxable income 16,250 4.2 Married Couples Allowance (MCA) There is an additional allowance available for older married couples and civil partners in the form of a tax reducer at a fixed rate of 10%, at Step 6 of the income tax computation. This is called the Married Couples Allowance (MCA). A married man who married before 5 December 2005, whose wife is living with him during all or part of 2007/08, is entitled to MCA. The amount he is entitled to depends on the ages of the couple and the husband's net income. For civil partners and couples who married on or after 5 December 2005, the MCA is claimed by the spouse or civil partner who has the higher net income. The amount depends on the ages of the couple and net income of the spouse or civil partner with the higher income. A taxpayer is entitled to make a claim for MCA if he or his spouse or civil partner was born before 6 April 1935 (ie aged 73 by 5 April 2008). If the older of the taxpayer or his spouse/civil partner is aged 73 or 74 at 5 April 2008, the amount of the MCA is 6,285. [Hp5] If the older of the taxpayer or his spouse/civil partner is aged 75 years or over at 5 April 2008, the amount of the MCA is 6,365. When the relevant taxpayer's net income exceeds 20,900 and the Personal Age Allowance has been reduced to 5,225, any excess income reduces the MCA in the same way as for the PAA. However, the MCA cannot be reduced below the minimum amount of 2,440. Worked example: Married Couples Age Allowance Simon was born on 19 July 1933. His net income for 2007/08 is 26,130. He married Jean, who was born on 22 August 1931, in January 2007. Jean has net income for 2007/08 of 12,380. Requirement Compute Simon's Personal Age Allowance and Married Couples Allowance. 12

INCOME TAX COMPUTATION 1 Solution Simon is aged 74 on 5 April 2008. The MCA is therefore based on Jean's age. However, Simon is the taxpayer entitled to claim the MCA since he has the higher net income in 2007/08 and the couple were married on or after 5 December 2005. Personal Age Allowance 7,550 Less: (26,130 20,900) = 5,230 ½ = 2,615 restricted to (2,325) Reduced Personal Age Allowance 5,225 Married Couple Allowance 6,365 Less: remainder of excess (2,615 2,325) (290) Reduced Married Couples Allowance 6,075 The spouse/civil partner who would not be entitled to claim the MCA may, independently of their spouse/civil partner, make a claim for half of the minimum amount of the MCA to be transferred to him or her. The claim must be made by the start of the tax year. Alternatively, the couple may jointly elect, again by the start of the tax year, to transfer half or all of the MCA to the spouse/civil partner who would not normally be entitled to it. For the year of marriage/civil partnership, an election can be made during the year. In the year of marriage/civil partnership, the MCA is reduced by 1/12 for each complete tax month (running from the 6 th of one month to the 5 th of the following month) which has passed before the marriage/registration of the civil partnership. 13

Taxation Summary and Self-test Summary Self-test Answer the following questions. 1 Marjorie is aged 22 and is a full-time student. In 2007/08, she received the following income: Scholarship from university 350 Earnings from vacation work (gross, PAYE deducted 910) 4,990 Dividends from UK company shares 450 How much tax is repayable to Marjorie? A 934 B 910 C 884 D 960 2 Jerry is aged 40. His only source of income in 2007/08 was trading income of 30,000. In July 2007, Jerry gave some shares quoted on the London Stock Exchange worth 5,000 to a charity. What is Jerry's taxable income? A 30,000 B 25,000 C 24,775 D 19,775 3 Paul and Oliver are civil partners. They own a house which they let out. The house is owned 40% by Paul and 60% by Oliver. Which one of the following statements is true? A The property income must be taxed equally on Paul and Oliver B Paul and Oliver are taxed together on the property income because they are civil partners C Paul and Oliver can elect for the property income to be taxed 40% by Paul and 60% by Oliver D Paul and Oliver can elect for the property income to be taxed 60% on Paul and 40% on Oliver 14

INCOME TAX COMPUTATION 1 4 Albert was born on 10 April 1932. During 2007/08, he received gross pension income of 17,000 and bank interest of 3,200. He paid 600 under the Gift Aid Scheme in September 2007. What Personal Age Allowance is available to Albert? A 7,500 B 7,550 C 7,640 D 7,690 5 Richard was born on 22 August 1931. His net income for 2007/08 is 26,800. Richard has been married to Lucy for many years. Lucy, who was born 30 April 1935, has net income for 2007/08 of 27,000. What Married Couples Allowance is available and who is it given to, assuming no election to transfer it has been made? A Lucy 5,560 B Lucy 5,640 C Richard 5,880 D Richard 5,780 6 Toby and Jane Toby and Jane are married. Toby was born on 13 November 1934 and Jane was born on 19 June 1931. In the tax year 2007/08, Toby and Jane had the following income: Toby Jane Pension (gross) 20,000 13,000 (tax deducted) (2,540) (970) Building society interest received 1,200 240 Dividends from UK companies 1,800 2,700 ISA dividends 1,500 Premium bond winnings 200 Property income 5,600 2,400 The property income is derived from a house which Toby and Jane own together in the proportions 70:30. In December 2007, Toby made a gift aid donation of 1,170. In March 2008, Jane gave quoted shares worth 2,500 to a charity. No elections have been made. Requirement Calculate the tax payable by Toby and Jane. (10 marks) Now, go back to the Learning Objectives in the introduction. If you are satisfied you have achieved these objectives, please tick them off. 15

Taxation Technical reference Legislation References are to Income and Tax Act 2007 (ITA 2007) unless otherwise stated Payroll Giving Scheme Income Tax (Earnings and Pensions) Act 2003 ss.713 715 Gifts of shares/land to charity s.431 Jointly owned assets Personal allowances Married couples allowance ss.836-837 ss.35-37 Ss.45-46 HMRC manual references Relief Instructions Manual (http://www.hmrc.gov.uk/manuals/remanual/index.htm) Gift aid relief: outline of the relief RE1830 Independent Taxation Manual (http://www.hmrc.gov.uk/manuals/inmanual/index.htm) This technical reference section is designed to assist you when you are working in the office. It should help you know where to look for further information on the topics covered in this chapter. You will not be examined on the contents of this section in your examination. 16

INCOME TAX COMPUTATION 1 Answers to Self-test 1 B 910 Marjorie Income tax repayable Non-savings Dividend income income Total Employment income 4,990 Dividends 450 100/90 500 Net income 4,990 500 5,490 Less: PA (4,990) (235) (5,225) Taxable income NIL 265 265 Scholarship is exempt from income tax. Tax 265 10% 26 Less: tax credit on dividend (restricted) (26) PAYE (910) Repayable (910) Note that the tax credit on dividends is set off first to ensure that the full amount of PAYE is recoverable. However, the excess tax credit of 24 (50 26) is not recoverable. 2 D 19,775 Jerry Taxable income Nonsavings income Trading income 30,000 Less: gift of quoted shares to charity (5,000) Net income 25,000 Less: PA (5,225) Taxable income 19,775 3 C Paul and Oliver can elect for the property income to be taxed 40% by Paul and 60% by Oliver Statement A is incorrect because, although the property income will usually be taxed equally on Paul and Oliver, they can make an election for them to be taxed in accordance with their actual shares. Statement B is incorrect because all individuals are independent taxpayers liable for tax on their own income. Statement D is incorrect because the election for unequal shares can only be made to reflect the actual shares in which the property is held. 17

Taxation 4 D 7,690 Albert is aged 75 on 5 April 2008. Net income adjusted for gift aid is: Pension 17,000 Bank interest 3,200 100/80 4,000 Net income 21,000 Less: gift aid 600 100/78 (769) Adjusted net income 20,231 Since the adjusted net income does not exceed the limit of 20,900, there is no adjustment in the Personal Age Allowance PAA (aged 75 and over) 7,690 5 C Richard 5,880 Since Richard and Lucy were married before 5 December 2005, Richard as the married man is entitled to the MCA. The allowance is based on Richard's age since he is the elder of the couple. Richard is aged 76 on 5 April 2008. Personal Age Allowance 7,690 Less: (26,800 20,900) = 5,900 ½ = 2,950 restricted to (2,465) Reduced Personal Age Allowance 5,225 Married Couple Allowance 6,365 Less: remainder of excess (2,950 2,465) (485) Reduced Married Couples Allowance 5,880 6 Toby Tax payable Non- savings Savings Dividend Income income income Total Pension income 20,000 Property income (N2) 4,000 BSI 1,200 100/80 1,500 Dividends 1,800 100/90 2,000 Net income 24,000 1,500 2,000 27,500 Less: PAA (W1) (5,225) (5,225) Taxable income 18,775 1,500 2,000 22,275 Notes (1) ISA investment income is exempt from income tax. (2) Property income from jointly owned property is taxed equally on a married couple unless an election is made to reflect actual ownership. Therefore each owner is taxed on (5,600 + 2,400) = 8,000/2 = 4,000. 18

INCOME TAX COMPUTATION 1 Tax 2,230 10% 223 16,545 22% 3,640 1,500 20% 300 2,000 10% 200 22,275 4,363 Less: MCA 6,140 10% (W2) (614) Tax liability 3,749 Less tax deducted at source Pension tax (2,540) 1,500 20% (300) 2,000 10% (200) Tax payable 709 WORKINGS (1) Toby is aged 73 on 5 April 2008. Personal Age Allowance 7,550 Less: ([27,500 1,500] 20,900) = 5,100 ½ = 2,550 restricted to (2,325) Reduced Personal Age Allowance 5,225 Note: Gift aid is 1,500 (1,170 100/78) (2) Toby will be entitled to the MCA because Toby and Jane were married before 5 December 2005 and Toby is the married man. The allowance will be based on Jane's age as she is the older (aged 76 on 5 April 2008). Married Couple Allowance 6,365 Less: remainder of excess (2,550 2,325) (225) Reduced Married Couples Allowance 6,140 Jane Tax payable Non-savings Savings Dividend income income income Total Pension Income 13,000 Property Income 4,000 BSI 240 100/80 300 Dividends 2,700 100/90 3,000 Less: gift to charity (2,500) Net income 14,500 300 3,000 17,800 Less: PAA (7,690) (7,690) Taxable income 6,810 300 3,000 10,110 19

Taxation Tax 2,230 10% 223 4,580 22% 1,008 300 20% 60 3,000 10% 300 10,110 Tax liability 1,591 Less tax deducted at source Pension tax (970) 300 20% (60) 3,000 10% (300) Tax payable 261 Premium bond winnings are exempt from income tax. 20

INCOME TAX COMPUTATION 1 Answer to Interactive question Answer to Interactive question 1 Michael Tax payable Non-savings Savings Dividend income income income Total Employment Income 23,695 Property Income 6,000 BSI 320 100/80 400 Bank interest 400 100/80 500 Dividends 1,890 100/90 2,100 Net income 29,695 900 2,100 32,695 Less: PA (5,225) (5,225) Taxable income 24,470 900 2,100 27,470 Tax 2,230 10% 223 22,240 22% 4,893 900 20% 180 2,100 10% 210 27,390 Tax liability 5,506 Less tax deducted at source PAYE (3,788) 900 20% (180) 2,100 10% (210) Tax payable 1,328 Interest on National Savings Certificates and betting winnings are exempt from income tax. 21

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